chapter 12

Question 1

preferred stock
par value
callable preferred stock

Answer 1

preferred stock: less available, more costly, pay dividends before common stock, take precedence if company is liquidated.
par value: face value of security
- dividend is a % of par value
callable preferred stock: when the stock is called back by the company, they want to buy it back and give you your money back

Question 2

The most popular stock in America:

Answer 2

the company’s stock the investor works for

Question 3

the value of common stock increases in 4 ways:

Answer 3

1. dollar appreciation of stock value
2. stock splits
3. mergers (may increase or decrease)
4. income from dividends

Question 4

4 main types of preferred stocks:

Answer 4

1. cumulative: if dividends are passed they accumulate and are paid next quarter. (most common)
2. participating: (rare), entitles holder to above and beyond the declared dividend
3. adjustable-rate: pays dividend that is adjustable, quarterly, based on changes in market rate
4. convertible: exchangeable for given # of common stock

Question 5

what is the main difference between common stock and preferred stock?

Answer 5

preferred stock always pays a dividend whereas common stock may or may not, and preferred stock takes precedence over common stock when paying dividends or if the company is liquidated

Question 6

Different categories of stock:

Answer 6

blue chip: nationally known companies, stable, long records of profit growth (AT&T, McDonalds, GE, etc)
cyclical stock: stock following business cycle (automakers, chemical companies, homebuilders)
defensive stock: remains stable with constistent dividends regardless of economy- they hold their value even when the econ. is weak (basic everyday goods/necessicities)
growth stock: young companies with expanding products
income stock: high current dividends, not worried about selling price. (utilities, gas, telephone, etc)
speculative stock: risky, newer stocks, with anticipation of gain and possible loss (usually VERY new companies)

Question 7

The only stock on both the original and current Dow Jones list is…

Answer 7

General Electric

Question 8

examples of stock by classification

Answer 8

aerospace
automotive
banks
chemicals
consumer goods
food 
manufacturing
telecommunications

Question 9

stock indicators

Answer 9

Dow Jones Industrial Average: 30 daily leading stock, most reported
S&P: Standard and Poor: 500 stock listings
NASDAQ index: virtual indicator of various stock, smaller, newer, technology companies
Russell 2000 index: based on what the company is worth
Willshire 5000 equity: broader indicator of the market

Question 10

Bull Market vs. Bear Market

Answer 10

bull market = market is up and good

bear market = market is down

Question 11

what company is the issuer of common stock?

Answer 11

New York Stock Exchange

Question 12

4 numerical measures of stock:

Answer 12

book value
earnings per share
Price Earnings ratio (PE)
Beta coefficient

Question 13

book value

Answer 13

company net worth (asset-liability) / shares of common stock

Question 14

earnings per share

Answer 14

profits of company compared to # of shares

Question 15

Price Earnings ratio

Answer 15

price of stock: earnings of company
low PE: 5-20 = stable, valuable, lower risk
high PE: 25 or higher = less stable, higher risk, may be newer company… may lead to large growth

Question 16

Beta coefficient

Answer 16

relationship between price of 1 share of stock and the annual earnings of the company
reflects the volatility of the company
- low beta = low risk, conservative
- high beta = high risk, aggressive

Question 17

What are the 3 investment theories?

Answer 17

Efficient market theory (random walk theory): CANNOT predict changes in market, use other methods to chose stock
Fundamental Theory: projections of Future earnings. works in high growth stock and new product development
Technical theory: WHOLE economy, overall patterns and trends

Question 18

primary market stocks

secondary market stocks

Answer 18

primary: very 1st time buying stock (no one has previously owned)
secondary: been previously bought and sold

Question 19

securities exchange

over the counter market (OTC)

Answer 19

securities exchange: location where stocks are exchanged
OTC: another form of stock exchange for those stocks not listed on securities and exchange
- usually small beginning stock

Question 20

Steps in a typical stock exchange transaction

Answer 20

1. chose 1 or 2 stock, do your research and observe patterns
2. place market order
3. determine long term and short term strategies

Question 21

limit order
stop order
discretionary order
round lots
odd lots

Answer 21

limit order: place limit on the amount to buy a share
stop order: price at which you wish to sell the stock
discretionary order: entrust that the stockbroker will determine when to buy and sell
round lots: integers of 100 (typically cheaper if bought this way)
odd lots: any other number of shares

Question 22

long term investment strategies

Answer 22

buy and hold
dollar cost averaging
dividend reinvestment plan
direct investment plan

Question 23

short term investment strategies

Answer 23

buying stock on margin: betting that capital gain will be greater than amount borrowed to buy stock
selling short: sell stock, to pay back borrowed money

Question 24

option
call
put

Answer 24

option: agreement to buy/sell stock
call: ability of the company to request pay-up/ purchase at that time
put: right to sell

Question 25

Federal regulation of stock market

Answer 25

SEC (securities and exchange commission)

Question 26

how to pick your first stock

Answer 26

1. chose 1 or 2 youre interested in, compare, and follow them
2. get familiar with ups and downs of that market
3. pay attention to scale of diagrams
4. check stock ratings (analysis ratings)

Question 27

common stock
dividends
stock split

Answer 27

common stock: any usual stock that is available in large amounts to everyone for normal price (buy shares of common stock)
dividends: what you get back (cash, company products, discounts, more stock)
stock split: company announces splitting the stock 2 for 1 (buy for half value) if you already have some it is split into 2x the shares